Find Out How Much Car You Can Afford

1. Assess Your Financial Situation

Before even browsing car listings or visiting dealerships, take a step back and examine your financial health.

• Monthly Income: Jot down your monthly post-tax income. This figure will be foundational in determining an affordable car payment.

• Monthly Expenses: Make a list of your monthly fixed expenses, including rent or mortgage payments, utility bills, groceries, and other recurring costs.

• Debt and Other Obligations: Factor in other financial obligations, such as credit card payments, student loans, or personal loans.

2. Adopt the 20/4/10 Rule

A general guideline that many financial advisors recommend is the 20/4/10 rule:

• 20% Down Payment: Aim to put down at least 20% of the car’s purchase price. This reduces the loan amount and potentially lowers the interest rate.

• 4 Years Financing: Don’t finance a car for more than four years.

• 10% of Monthly Income: Your car payment and related expenses (insurance, maintenance) shouldn’t exceed 10% of your monthly take-home pay.

3. Determine Your Budget

Using the above criteria, calculate a ballpark figure for an affordable car. For example, if your monthly take-home pay is CAD $3,000, you shouldn’t be spending more than CAD $300 on car-related expenses.

4. Consider Total Ownership Costs

Remember, the purchase price isn’t the only cost associated with owning a car. Factor in:

• Insurance: Premiums vary based on the car’s make, model, and your driving history. With an increase of up to 37% in certain cities it’s important to shop around. 

• Fuel: Research the car’s miles-per-gallon (MPG) ratings and estimate monthly fuel costs.

• Maintenance and Repairs: Newer cars might come with a warranty, but older models might require more frequent repairs.

• Depreciation: Some cars lose value faster than others. If you plan to trade in or sell the vehicle later, this is crucial to consider.

5. Save for a Down Payment

The larger the down payment, the smaller the loan and the less you’ll pay in interest. This also means lower monthly payments and a better chance of approval for financing.

6. Shop for the Best Financing Rates

Before setting foot in a dealership, research interest rates from different banks, credit unions, and online lenders like Rifco. By having pre-approval, you’re in a stronger negotiating position.

7. Avoid Long-term Loans

While it might be tempting to opt for a long-term loan like 72-month or 84-month because of the lower monthly payments, you’ll end up paying significantly more in interest. Stick to shorter-term loans.

8. Factor in Future Financial Changes

Are you planning to buy a house? Starting a family? Changing jobs? Consider how these changes will impact your financial situation and your ability to handle car payments.

9. Consider a Less Expensive Car

If the numbers aren’t adding up, it might be wise to consider a less expensive car or even a used vehicle. Remember, a car is a depreciating asset. The primary goal is reliable transportation.

10. Keep Emotions in Check

While it’s easy to fall in love with a shiny new car, it’s crucial to think practically. Base your decision on sound financial principles, not emotions.

11. Regularly Review Your Car Budget

After purchasing your car, periodically reassess your budget. If you’re consistently struggling with payments, it may be worth considering trading in for a more affordable vehicle.

Conclusion:

Determining how much car you can afford requires a balance of research, practicality, and introspection. Don’t forget to use tools like car loan calculators to make your monthly payment calculations a breeze. By understanding your financial health, considering total ownership costs, and keeping long-term goals in perspective, you can make a choice that ensures both smooth driving and financial stability.